STMicroelectronics Earnings: We’re Impressed by Automotive Revenue; Raising Our Valuations

Narrow-moat STMicroelectronics STMPA sparkled with solid second-quarter results and a promising outlook for the rest of the year, as the company continues to perform well in automotive chip revenue. We raised our fair value estimates to $66 from $59 for U.S. shares (EUR 60 from EUR 55 for European shares), which would equate to a 2023 price/earnings ratio of 15 times. We still view the company as modestly undervalued.

Revenue in the second quarter was $4.33 billion, up 2% sequentially, up 13% year over year and above guidance of $4.28 billion. Automotive and discrete revenue was again the bright spot, up 8% sequentially and 34% year over year, thanks again to the company’s leadership in silicon-carbide-based semis used in electric vehicles, as well as its position as a chip manufacturer for Mobileye, a leading active safety systems provider into cars. STMicroelectronics’ microcontroller and digital, or MDG, segment rose 4% sequentially and 14% year over year, as demand in China is starting a slow recovery, similar to what we heard from STMicroelectronics’ peers earlier this week. Analog, MEMS, and sensors, or AMS, revenue fell 12% sequentially and 17% during the seasonally weak second quarter, and management conceded that it will have less content in Apple’s upcoming slate of iPhones this fall. Gross margin came in at 49% as expected, down 70 basis points sequentially but still near record-highs for the firm, as STMicroelectronics’ 50% long-term target still appears achievable.

In the September quarter, STMicroelectronics anticipates revenue of $4.38 billion, which would represent 1% growth both sequentially and year over year. By segment on a year-over-year basis, ADG should grow “well above 20%,” MDG will grow “slightly,” and AMS will fall by 31% due to the lost content at Apple. For the full year, STMicroelectronics still expects revenue of $17.4 billion, which would represent 8% annual growth and implies flattish revenue in the December quarter as well.